Trader Seized on Mortgage-Security Boom

Wall Street Firm Gave Rein to Star to Work With Paulson on Structuring Deal

By

Kate Kelly

Updated April 17, 2010 12:01 a.m. ET

Fabrice Tourre, the Goldman Sachs Group Inc.GS-1.03% employee at the center of a regulatory case alleging securities fraud, is a midlevel trader whose star rose when securities backed by risky mortgage loans were hot.

A 31-year-old Frenchman who described himself in an email as "fabulous Fab," Mr. Tourre received a paycheck of more than $2 million as a vice president in the firm's New York office in 2007, people familiar with the matter say. That compensation was due partly to his success with the deal at the center of the controversy, according to one of those people.

In a case that has rocked Wall Street, the Securities and Exchange Commission accused Goldman and Mr. Tourre in a civil lawsuit of misleading a client about how subprime-mortgage assets were packaged to help a favored hedge-fund client profit on the housing collapse.

Neither Mr. Tourre nor his attorney, Pamela Chepiga at Allen & Overy LLP, responded to requests for comment. Goldman says it has done nothing wrong and is fighting the charges, filed in a New York federal court.

Mr. Tourre was "principally responsible for the structuring and marketing" of the product at the center of the SEC complaint. Mr. Tourre—who worked in New York at the time but has since moved to London as an executive director at Goldman—helped arrange the deal, believing the housing market was about to collapse, the SEC says.

Behind the Screen: Excerpts of Tourre Emails

Feb. 2, 2007: Mr. Tourre to a colleague, apparently regarding Mr. Paulson's intention to short the bonds without ACA's knowledge: "I am at this aca paulson meeting, this is surreal."

Feb. 11, 2007: To Mr. Tourre from a more senior trader in Goldman's structured product unit: "the cdo biz is dead we don't have a lot of time left." (sic)

Mar. 2, 2007: Mr. Tourre to a colleague working with one of the Abacus investors: "This is a portfolio selected by ACA…"

A later Tourre email to a colleague (no date given): "the portfolio was selected by ACA/Paulson."

In an email he wrote to an associate cited by the SEC, Mr. Tourre wrote: "More and more leverage in the system, The whole building is about to collapse anytime now...Only potential survivor, the fabulous Fab...standing in the middle of all these complex, highly leveraged, exotic trades he created without necessarily understanding all of the implications of those monstruosities!!!"

No one is suggesting that Mr. Tourre was a rogue trader. Indeed, Goldman's "Mortgage Capital Committee" signed off on the deal, according to the complaint. That committee included "senior-level management," the SEC says—suggesting that executives far above Mr. Tourre's pay grade were involved in the transaction.

Goldman says it made the proper disclosures on the transaction, and in fact lost $90 million on the deal. In a statement, Goldman said that the charges were "completely unfounded in law and fact" and that it would "vigorously contest them."

Despite his relatively junior role at the time, Mr. Tourre had successfully packaged and sold a bond-backed product called Abacus 2007-AC1 to institutional investors, according to legal filings, and Goldman rewarded him for his efforts.

A short trader known for what colleagues called a goofy sense of humor, Mr. Tourre was a well-liked figure in Goldman's downtown New York offices during the housing boom of 2007.

It was a heady time for the firm. Led by a slow-talking Texan named Dan Sparks, Goldman's mortgage business, a 400-person global operation, was positioned to profit wildly from a bearish bet it had made on the market for risky mortgages.

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At the same time, the business of bundling bonds into complex new securities—known as synthetic structured products—was on a tear.

Early in the year, Mr. Tourre—who had ties to important firm clients like the hedge fund Paulson & Co. and IKB Deutsche Industriebank AGIKB-3.39%, people familiar with the matter say—began structuring Abacus, a new structured product to be made up of a collection of risky home loans.

Mr. Tourre hit it off with an array of clients—including Paolo Pellegrini, an Italy-born fund partner at Paulson with whom he once attended a tennis match, says someone familiar with the matter. Mr. Pellegrini, among others at Paulson, was interviewed by staff at the SEC as part of its investigation into the Abacus deal.

In launching the Abacus product, Mr. Tourre sought the imprimatur of ACA Management LLC, an independent firm that analyzed mortgage loans. But the SEC alleges that Mr. Tourre instead relied heavily on input from his contacts at Paulson, according to the SEC. Paulson wanted to make a bearish, or short, bet on the market for risky home loans.

SEC v. Goldman Sachs

The Abacus deal was finalized in April 2007, and Goldman collected a $15 million fee from Paulson for structuring and marketing it, according to the SEC. But the product was a failure for its longer-term investors, who it says lost over $1 billion.

ACA representatives couldn't be reached for comment. Paulson said in a statement that "we were not involved in the marketing" of Abacus products and that ACA "had sole authority" over the bond selection.

Dozens of deals like Abacus were packaged over the course of several years, said people familiar with the matter. Structured products had become so successful, in fact, that in 2008, Mr. Tourre moved to the firm's London office to help launch the same business in Europe.

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